Bloomberg News

Credit Swaps on Biggest Banks Decline; Markit CDX Index Falls

January 15, 2014

The cost to protect against losses on the bonds of the biggest U.S. banks approached the lowest level in six years after Bank of America Corp. (BAC:US) reported quarterly profit that more than quadrupled. A measure of U.S. corporate credit risk fell for a second day.

The average price on credit-default swaps of the six largest banks fell 1.1 basis points to 70.9 basis points as of 4:38 p.m. in New York as investor sentiment improved with banks cleaning up balance sheets and making legal settlements on cases related to the financial crisis, according to prices compiled by Bloomberg.

Bank of America posted net income of $3.44 billion as the second-biggest U.S. lender began to shift attention from the mortgage cleanup to improving performance at operating units. Wells Fargo & Co. (WFC:US), the largest home lender, yesterday said it attained record fourth-quarter and full-year profit, benefiting from unprecedented Federal Reserve stimulus measures that lowered interest rates and sparked a refinancing wave.

“The earnings have been coming out OK,” Robert Grimm, head of corporate trading at Odeon Capital Group LLC in New York, said in a telephone interview. “Certainly for the large banks, people are feeling a lot more comfortable.”

Credit swaps on banks last fell below 71 basis points in January 2008, Bloomberg prices show.

BofA Profit

Bank of America’s net income rose to 29 cents a diluted share, from $732 million, or 3 cents, a year earlier, according to a statement today from the Charlotte, North Carolina-based firm. Wells Fargo’s net income advanced 10 percent last quarter to $5.61 billion, or $1 a share, from $5.09 billion, or 91 cents, a year earlier, the San Francisco-based company said in a statement.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, decreased 1.4 basis points to 63.5 basis points as of 4:59 p.m. in New York, according to prices compiled by Bloomberg. The measure has dropped from 66.2 basis points on Jan. 13, the highest level since Dec. 18.

The swaps measure typically falls as investor confidence improves and rises as it deteriorates. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Petroleos Mexicanos

Petroleos Mexicanos, Mexico’s state-owned oil company, plans to raise $4 billion, offering dollar-denominated bonds due in five, 10 and 30 years as soon as today, according to a person with knowledge of the transaction.

Pemex, as the oil producer is also known, plans to offer a $3 billion portion of 30-year securities that may yield 260 basis points more than similar-maturity Treasuries, according to the person, who asked not to be identified because terms aren’t set. Pemex was the biggest Mexican issuer of corporate debt last year after raising $9.2 billion in the international market, according to data compiled by Bloomberg.

The covenant quality of North American high-yield bonds improved for the second straight month in December, according to a monthly report by Moody’s Investors Service. The average covenant quality score improved to 4 in December from 4.18 in November on Moody’s five-point scale, in which 1 denotes the strongest investor protections and 5, the weakest.

The risk premium on the Markit CDX North American High Yield Index, tied to the debt of 100 speculative-grade companies, narrowed 6.6 basis points to 311.1, Bloomberg prices show. High-yield, high-risk bonds are rated below Baa3 by Moody’s and less than BBB- at S&P. A basis point is 0.01 percentage point.

The extra yield investors demand to hold investment-grade corporate bonds rather than government debt fell 1 basis point to 108, Bloomberg data show.

To contact the reporter on this story: Jessica Summers in New York at jsummers20@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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Companies Mentioned

  • BAC
    (Bank of America Corp)
    • $17.26 USD
    • 0.54
    • 3.13%
  • WFC
    (Wells Fargo & Co)
    • $53.79 USD
    • 1.02
    • 1.9%
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